Can Growth Be Explained Without The Entrepreneurial Process?

The Economist last week had an interesting article on growth theory and a recent book by David Warsh: Knowledge and the Wealth of Nations (see here). The article summarizes the state of the economics of growth since Robert Solow’s famous paper in 1956 and the rise of endogenous growth theory in the last thirty years (especially with the work of Paul Romer). Romer’s argument rests on increasing returns to scale and the non-rival nature of knowledge. According to The Economist, Solow has expressed doubts with regard to Romer’s endogenous solution. As the article puts it:

Solow did not intend in his 1956 model to deny that innovation is often dearly bought and profit-driven. The question is whether anything useful can be said about that process at the level of the economy as a whole.

As I read the debate, economists are stuck in between two solutions. On the one hand, technology falls like “manna from heaven” and thus no one can really explain the process of productivity change—it is exogenous. On the other hand, endogenously produced knowledge has increasing returns properties. But even then, one may wonder where those ideas come from. We are still in a closed universe.

Among neoclassical economists, Kenneth Arrow has the most acute perception of that issue. “While dissemination of existing information can certainly account for some gains in productivity,” he explained, “it is clearly necessary for sustained growth to have information new to the entire system, not merely learned from others. Where does this new knowledge come from?” Moreover, these models generally rest on assumptions that guarantee the increasing marginal productivity of capital.

Economists should consider the solution that reconciles both sides of the debate: entrepreneurial discovery. Indeed, it is only through entrepreneurial discovery that technological change becomes endogenous and that the need to do away with the fundamental assumption of decreasing marginal returns in economics disappears.

One reference is Israel Kirzner’s chapter 4 in Discovery and the Capitalist Process. The work of Randall Holcombe is also useful here. Finally, see my working paper, “Economic Transformation, the Pretence of Knowledge and the Process of Entrepreneurial Competition” (here), written for the debate on Economic Transformation at the New Zealand Treasury where I developed all these points.

Comments

[PEmberton]

Did we not already have a theory of endogenous innovation back in 1776, long before neoclassical and Austrian economists?
Adam Smith pointed out that specialization and division of labor would make room for a class of "thinkers" or philosophers to develop (macro-innovators) while the breaking up of industrial processes into sequences would suggest capital could replace labor and increase productivity (micro-innovation). machinerworkers to think of ways to use machinery thinkers to develop

[benny]

there is indeed a growth model called the "schumpeter modell" that explains technology through the entrepreneurial process. i think it was developed around 1992-94, but i havent been far enough in my course on growth yet. ;)

[Vinay Taylor]

However, I must add that Schumpetrs model of technological change did not explain the origin of technological progress, but rather lik Marx, explained that it was driven by "raw instinct", his addition was that the quantity of entreperneurs in society was an important determinant. Again no indication of the origin of ideas.